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March 26, 2012

The Persistent Problem of the “Truncated Tribunal” Washes Ashore in New Orleans

The persistent problem of what may be called the “party-disabled arbitrator”  and the resulting “truncated tribunal,” especially in arbitrations involving States, surfaced this month in a federal district court decision from New Orleans.  The party-disabled arbitrator begins the proceedings as the party-appointed arbitrator, but at some point the party determines that its interests are best served by attempting to obstruct the functioning of the tribunal by interfering with the ability of its party-appointee to continue to carry out his or her mandate.  (For a long historical view of the problem, see Judge Stephen Schwebel’s treatment in the 1994 Lord Goff lecture, “The Validity of an Arbitral Award Rendered by a Truncated Tribunal,reprinted in S. Schwebel, Justice In International Law: Further Selected Writings (Cambridge University Press 2011)).  In First Investment Corp. of the Marshall Islands v. Fujian Mawei Shipbuilding, Ltd., 2012 WL 831536 (E.D. La. Mar. 12, 2012), the US court never reached the merits of the truncated tribunal issue, finding instead that it lacked personal jurisdiction over the Chinese corporate award debtors, and lacked subject matter jurisdiction over the People’s Republic of China. But the court’s opinion provides the background of that issue in considerable detail, and reveals that it was the decision of a PRC court, refusing to confirm the award on the basis that a truncated tribunal lacked power to issue it, that led to this failed effort to have the award confirmed in the US.

The underlying dispute involved a shipbuilding contract between a Marshall Islands entity and two Chinese companies, the first wholly-owned by the PRC, the second wholly-owned by the first. Arbitration was to (and did) take place in London before a three-member tribunal under English law and the arbitration rules of the London Maritime Arbitrators Association (LMAA). Each side appointed an arbitrator — Respondents appointed a PRC national — and the party-appointees jointly selected Professor Martin Hunter to preside.

After the closing of the proceedings and deliberations by e mail, including issuance of a deliberations memorandum by the Respondents’ party-appointee, Professor Hunter circulated a draft award. Respondents’ arbitrator then provided written comments and a draft dissenting opinion. Professor Hunter proposed a deliberations session in London to work out the points of disagreement, and the Respondents’ arbitrator agreed to attend while also stating that he was willing to complete deliberations by e mail. Before the scheduled London session, PRC authorities detained the arbitrator, preventing his attendance and his further participation.  (A case comment on the PRC Court’s decision on the website of a PRC law firm asserts that the detention was for reasons unrelated to the arbitration. See www. Internationallawoffice.com/newsletters/detail.aspx?g=d207afa3). But the US court decision appears to accept the premise that the detention was specifically intended to prevent the arbitrator from participating in the remaining deliberations and issuance of the award.) When it was evident the Respondents’ arbitrator could not participate further, and could neither receive the revised draft of the award nor attend a deliberations session in London, the final award was issued, signed only by Professor Hunter and Claimants’ appointee, and including the detained arbitrator’s dissenting opinion as provided in draft form prior to his detention. Concurrently, the Tribunal acting by majority issued a procedural order explaining its reasons for believing it was empowered to proceed with issuance of the final award, including mention of the fact that the detained arbitrator had expressed willingness to have the award issued without further deliberations if his dissenting opinion were included.

Today this scenario is widely regulated by rule, in the 2010 UNCITRAL Rules and those most major arbitral institutions. But there are considerable variations in conditions and methods, reflecting a lack of consensus on this very delicate issue involving an ostensible collision of fundamental arbitral values. The issue is removed from the discretion of the other two arbitrators by UNCITRAL Rule 14(2)(b) (appointing authority decides), ICC Article 15(5) (ICC Court decides), and Stockholm Chamber of Commerce Article 17(2) (Board of the Arbitration Centre decides).  At the other end of the spectrum, the decision whether to proceed is left to the sole discretion of the other members of the tribunal by ICDR Article 11 and LCIA Article 12.  And the latter rules permit a decision to proceed as a truncated tribunal if the third arbitrator’s failure to participate occurs at any stage – as does the Stockholm Rule – whereas the UNCITRAL and ICC Rule permit authorization for a truncated tribunal to be considered only when the difficulty arises after the closure of the proceedings.   The Singapore International Arbitration Centre rules contain no provision for a truncated tribunal, and instead provide in Article 13.2 that an arbitrator who fails to participate or is prevented from participating shall be challenged, and if the challenge is accepted shall be replaced.

But in the First Investment case, the LMAA arbitration rules had no provision for a truncated tribunal, and the English Arbitration Act of 1996 (as the lex arbitri of this London-venued case) does not address the question. The LMAA Rule reading most closely on the situation stated that “After the appointment of the third arbitrator decisions, orders or awards shall be made by all or a majority of the arbitrators.”   That is to say, neither the rules nor the lex arbitri directly addressed the power of the tribunal to proceed when the participation of a party-appointed arbitrator was evidently interfered with at the behest of the appointing party after the closure of the proceedings but prior to issuance of the award.

Measured against the array of different approaches taken by the leading arbitration rules, and against disparate judicial decisions in different national courts, the decision of the PRC court in the First Investment case, applying the New York Convention to refuse to confirm the +$30 million award on the ground that the procedure had been not in accordance with the agreement of the parties, should not necessarily be seen as an outlier or as a partisan application of the New York Convention in favor of PRC-affiliated entities.

For example, the Swiss Supreme Court in a decision in January 2011 stated the governing principle of Swiss federal law to be that unless the parties have so agreed, upon the (even unjustified) resignation of one member of a three-member tribunal, the remaining two arbitrators have no power to proceed further with the case absent agreement of the parties that they may do so. The Swiss Supreme Court in that case stated however that the rule is different where the arbitrator appointed by a party does not resign but instead without justification refuses to participate, especially in deliberations.  In such case, said the Swiss Supreme Court, the Tribunal remains properly constituted and may proceed to an award, if necessary circulating the draft to the recalcitrant arbitrator to make clear the continued opportunity for that arbitrator to participate. (See Swiss Supreme Court decision of Jan 3, 2011 in Belmonte v. World Anti-Doping Agency et al, English translation published at www.praetor.ch. See also, N. Voser & S. Stark Traber, “Swiss Supreme Court Holds That the Principle of Ne Bis Idem Forms Part of Public Policy,” www.arbitration.practicallaw.com/9-504-9921 (Mar. 2, 2011)) Gary Born in his treatise records that the “predominant response” of international tribunals in cases involving State parties has been to recognize an obligation of the remaining two arbitrators to proceed (G. Born, International Commercial Arbitration (Kluwer 2009), Vol. 1 at 1590) — this however being more an arbitral view of the problem than a consensus view of national courts asked to enforce the awards of such tribunals when they are subject to judicial confirmation. In a 2010 decision, Russia’s highest commercial court set aside award in favor of a Moscow real estate corporation, reasoning that award rendered by two arbitrators more than two months after death of the third constituted breach of the principle of equal treatment of the parties and equal representation in the arbitral tribunal. (See Philipp Peters, “Arbitration Decisions by Truncated Tribunals — An All Time Favorite,” www.Kj-legalcom, Dec. 27, 2010).  But the case of a deceased arbitrator is perhaps distinguishable and not indicative of how that court would have ruled in a case involving unjustified non-participation by an arbitrator that was apparently procured by the appointing party.

The element of the PRC court’s decision in First Investment that may be debated is its interpretation of the factual record. What that court viewed as the election of Professor Hunter and the Claimant’s appointee to proceed with final deliberations as a truncated tribunal, could quite plausibly be viewed as a unexceptional final award by majority issued after completion of deliberations by the full tribunal.  Indeed the procedure followed by the majority after the detention of the Chinese party’s appointed arbitrator hued quite closely to the formula recommended in the Fouchard Gaillard Goldman treatise:

The two remaining arbitrators can circumvent the passivity or obstruction of the first arbitrator and deliberate validly by putting questions to the first arbitrator in writing and by forwarding him or her a draft of the award.  By considering the first arbitrator’s silence to constitute a negative response or disagreement, the award can be made by a majority decision of the two remaining arbitrators, without infringing the requirement for collegial deliberation.

 

(P. Fouchard, E. Gaillard, B. Goldman, International Commercial Arbitration (Gaillard & Savage, eds.) (Kluwer 1999), § 1136 at 616).

An arbitral tribunal that follows this prescription should not often be condemning the prevailing party to an enforcement morass. Indeed the Respondents in the case under discussion apparently were sufficiently confident that Professor Hunter’s chosen course would be sustained by the UK courts that they elected not to seek vacatur of the award. Of course a tribunal would be wise first to elicit the comments of the parties — and the US federal court decision in First Investment indicates that Professor Hunter and his colleague did so. The party comments so elicited might in some cases reveal that the party expecting to prevail would prefer the appointment of a replacement arbitrator even considering the attendant delay and cost. Such a response might be forthcoming especially where the applicable rules or governing arbitration law provide (i) for institutional- or appointing authority-appointment of the replacement arbitrator, and (ii) for the reconstituted tribunal to have discretion to move forward without repeating proceedings.

Should a US court ever face this issue in an enforcement or vacatur context, perhaps a rather straightforward common law contract analysis could lead to a satisfactory solution. Each arbitrator is contractually bound to the parties and to the appointing institution or authority to serve and participate fully in the work of the tribunal up to the issuance of the final award. The failure to do so, whether by resignation or by failure of participation, unless legally justified, is a breach of contract. The breach being one that causes irreparable injury, i.e. injury that cannot be measured or adequately remedied by money damages, it should be the subject of an equitable remedy. Specifically the purported resignation or non-participation should not be recognized as a lawful withdrawal from the Tribunal, and the further actions of the Tribunal taken by majority — provided that the applicable rules permit decisions, awards, and orders by majority — should be seen as actions of the full tribunal deciding by majority vote, not actions of a truncated tribunal, unless the recalcitrant arbitrator is deprived of the opportunity to participate in those actions by the procedures adopted by the majority.

Sound reasons of policy and principles of international law support this approach, but the contractual approach has the advantage of avoiding judicial adoption of a rule of decision based on sources that may themselves generate controversy in a US judicial forum. In regard to policy, I refer to Judge Schwebel’s report of the position taken by the ICC Court of Arbitration in Case No. 5017 (1987), Ivan Milutinovic PIM v. Deutsche Babcock AG. (See S. Schwebel, “The Authority of a Truncated Tribunal,reprinted in S. Schwebel, Justice in International Law: Further Selected Writings (Cambridge University Press 2011)).  When a party-appointed arbitrator in that case withdrew at a late stage of the hearings, the ICC Court refused to accept the purported resignation and declared that the withdrawing arbitrator was obliged to continue. The final award in that case, which included fully reasoned support for the conclusion that the tribunal had power to adjudicate, was accepted by the ICC Court. Notably, the award expressed that it is “‘more and more accepted that in international commercial arbitration the possibility of delaying tactics is a serious concern and the elimination of these effects a primary task of all involved.'” The Swiss Federal Tribunal ultimately sustained vacatur of the award — an outcome Judge Schwebel terms “calamitous” and “inconsonant with the principle that a party may not invoke its own wrong — or a wrong that it adopts as its own — to deprive another party of its rights.”  As we have seen above, the Swiss Supreme Court in 2011 identified the distinction in earlier Swiss case law between the resignation of the arbitrator (requiring replacement) and the willful unjustified nonparticipation (permitting the remaining arbitrators to proceed).

It may be inferred that under Swiss contract law it was deemed not possible or not appropriate to treat the arbitrator’s purported resignation as ineffective to terminate his or her mandate and to de-constitute the tribunal.   But under the common law of contracts of most US states and “federal common law,” there is ample support for the view that the purported termination of a contract without just cause is legally ineffective if there would be no adequate remedy at law for the contractual breach. More ambitiously, US courts might derive from international arbitral case law (notably decisions of the Iran-United States Claims Tribunal, and the seminal award in Himpurna California Energy Ltd. v. Republic of Indonesia, Final Award of Oct. 16, 1999 reprinted in 15 Mealey’s International Arbitration Report (Feb. 2000)) a rule of customary international law that a party that has consented to an international adjudicatory proceeding cannot take actions calculated to frustrate the agreed process, and if it does so by preventing its own party-appointing arbitrator from functioning, may not be heard to complain that the award rendered by the remaining arbitrators is not in accordance with the agreement of the parties.  And that rule might translate into a New York Convention rule of “unclean hands,” preventing the offending party from invoking an Article V defense to enforcement of the award where the opportunity for the defense to be asserted arises from the invoking party’s own unlawful conduct. The difficulty with such a rule in practice, however, is that its application should not occur except upon detailed findings of fact, upon a full evidentiary record, concerning the culpability of the party in the interference with its appointed arbitrator.  The contractual approach both absolves the US court of the need to make judgments about the conduct of parties who often will be, or will be owned or controlled by, foreign States, and permits the US court to conduct a streamlined summary confirmation proceeding in accordance with the intent of Congress in the enactment of the implementing legislation for the New York Convention.